The recommendations of Wall Street analysts are often relied on by investors when deciding whether to buy, sell, or hold a stock. Media reports about these brokerage-firm-employed (or sell-side) analysts changing their ratings often affect a stock’s price. Do they really matter, though?
Let’s take a look at what these Wall Street heavyweights have to say about SM Energy (NYSE: SM) before we discuss the reliability of brokerage recommendations and how to use them to your advantage.
SM Energy currently has an average brokerage recommendation of 1.85, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 13 brokerage firms. An ABR of 1.85 approximates between Strong Buy and Buy.
Of the 13 recommendations that derive the current ABR, seven are Strong Buy and one is Buy. Strong Buy and Buy respectively account for 53.9% and 7.7% of all recommendations.
Brokerage Recommendation Trends for SM
While the ABR calls for buying SM Energy, it may not be wise to make an investment decision solely based on this information. Several studies have shown limited to no success of brokerage recommendations in guiding investors to pick stocks with the best price increase potential.
Are you wondering why? The vested …